Why the Two Steves Should Buy Madison Square Garden

Tucked away at the bottom of Cablevision’s earnings report Thursday was a curious note: “The Board of Directors of Cablevision has authorized

Tucked away at the bottom of Cablevision’s earnings report Thursday was a curious note: “The Board of Directors of Cablevision has authorized the company’s management to explore the spin-off of its Madison Square Garden business.

That admission, with no additional explanation or elaboration given, touched off a flurry of speculation: Will the Dolan family, which controls Cablevision, sell its moneymaking sports franchise to raise cash? Will it just separate it and stick with it themselves?

Allow us to speculate a bit further. If Madison Square Garden indeed goes up for sale, there are two could-be buyers with potentially billions to gain in value: New York real estate titans Stephen Ross and Steve Roth.

The Garden would seem to be more valuable to the billionaire duo, who, respectively, are the chairs of the Related Companies and Vornado Realty Trust, than to any other potential buyer out there, something that owes nothing to their allegiances to the Knicks or Rangers. (Though Mr. Ross does know something about owning a professional sports team: He completed a $1 billion purchase of the Miami Dolphins in January.)

Rather, the high value to Related and Vornado has everything to do with Moynihan Station, a plan that calls for expanding and remaking Penn Station. Such a proposal has been in the planning stages for the better part of two decades, never maturing. Attached to the Garden is 5.4 million square feet of development rights—air rights that, per a provision in the zoning, are locked and unusable unless Penn Station is completely remade. But, according to numerous officials who have worked on the project, the way Penn Station is constructed makes it difficult to do any sort of major renovation of the dimly lit claustrophobic transit hub without first removing the Garden and then stripping down the entire station.

Given that Vornado owns essentially half the neighborhood surrounding Madison Square Garden, and Related is its 50-50 joint venture partner in Moynihan, if the two were able to get their hands on those air rights, they would be able to (eventually) remake the midtown south district and build numerous new towers in the area. Back in headier times, Mr. Roth said simply redoing Penn Station would make Vornado “$1.2 billion in value creation,” adding that “we are about making money here on a grand scale.”

In all, $14 billion in construction was once planned if the transaction had ever come together.

The two Steves put relentless efforts into this plan between 2005 and 2008, trying to convince the Dolan family to move to the rear of the neighboring Farley Post Office—where the developers would build them a brand-new arena—and purchase the Garden with its air rights. But the Dolans balked at the uncertainty and lack of progress on the part of the government, which would have needed to put up in the neighborhood of $1.5 to $2 billion in public funds to rebuild Penn Station. The Dolans ultimately pulled out, and now the public sector is aiming to do a scaled-down version of Moynihan, but even that is up to $1 billion short of funds, at least by one recent estimate.

Thus, those air rights are surely far more valuable to the two developers, who would be able to move the Garden themselves and then use the air rights, than they would be to some other team owner, who would be far less certain about eventually ever striking a deal to sell the arena to the developers and getting a new arena in return.

Of course, the economic environment is extraordinarily different than it was a year ago, when the two Steves were still scrambling for ways to make the project come together. Demand for Manhattan office space—the key driver in the astronomical value the project could create for the developers—is way down, and dropping still. Further, it’s hard to imagine that Related and Vornado would have an easy time raising whatever it would cost to buy the Garden, if it does happen to go up for sale. And it’s even harder to imagine the public sector would be ready to commit the needed money on its part given the gaping budget holes seen in Albany and City Hall.

As for the thoughts of those involved? Neither Related nor Madison Square Garden had any comment on this highly speculative concept.

Why the Two Steves Should Buy Madison Square Garden